Posted: September 16th, 2017

Allen Young has always been proud of his personal investment strategies and has done very well over the past several years

3-22 Allen Young has always been proud of his personal investment strategies and has done very well over the past several years. He invests primarily in the stock market. Over the past several months, however,Allen has become very concerned about the stock market as a good investment. In some cases it would have been better for Allen to have his money in a bank than in the market. During the next year,Allen must decide whether to invest $10,000 in the stock market or in a certificate of deposit (CD) at an interest rate of 9%. If the market is good, Allen believes that he could get a 14% return on his money. With a fair market, he expects to get an 8%return. If the market is bad, he will most likely get no return at all—in other words, the return would be 0%. Allen estimates that the probability of a good market is 0.4, the probability of a fair market is 0.4,and the probability of a bad market is 0.2, and he wishes to maximise his long-run average return.
(a) Develop a decision table for this problem.
(b) What is the best decision?
3-23 In Problem 3-22 you helped Allen Young determine the best investment strategy. Now, Young is thinking about paying for a stock market newsletter. A friend of Young said that these types of letters could predict very accurately whether the market would be good, fair, or poor. Then, based on these predictions,Allen could make better investment decisions.
(a) What is the most that Allen would be willing to pay for a newsletter?
(b) Young now believes that a good market will give a return of only 11% instead of 14%. Will this information change the amount that Allen would be willing to pay for the newsletter? If your answer is yes, determine the most that Allen would be willing to pay, given this new information.
5-15 Data collected on the yearly demand for 50-pound bags of fertilizer at Wallace Garden Supply are shown in the following table. Develop a 3-year moving average to forecast sales. Then estimate demand again with a weighted moving average in which sales in the most recent year are given a weight of 2 and sales in the other 2 years are each given a weight of 1. Which method do you think is best?
DEMAND FOR FERTILISER                             YEAR (1,000S OF BAGS)
1                                                                                              4
2                                                                                              6
3                                                                                              4
4                                                                                              5
5                                                                                              10
6                                                                                              8
7                                                                                              7
8                                                                                              9
9                                                                                              12
10                                                                                           14

11                                                                                           15

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